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Overconfidence and credit risk-taking in microfinance institutions: a cross-regional analysis

Marwa Fersi (Faculty of Economics and Management of Sfax, University of Sfax, Sfax, Tunisia)
Mouna Boujelbène (Faculty of Economics and Management of Sfax, University of Sfax, Sfax, Tunisia)

International Journal of Organizational Analysis

ISSN: 1934-8835

Article publication date: 21 June 2021

Issue publication date: 7 December 2022

401

Abstract

Purpose

The purpose of this paper is to investigate the impact of loan officers’ overconfidence on risk-taking decision and solvency performance measured by z-scores in the context of Islamic and conventional microfinance institutions (MFIs).

Design/methodology/approach

A random effect generalized least square regression was applied to examine the effect of overconfidence on credit risk-taking. The data set covers 326 conventional MFIs and 57 Islamic MFIs in six different regions over the period of 2005–2015.

Findings

Overconfidence proxies have shown through high loan growth, low-interest margin and loan loss provision reveal negative consequences on risk-exposures for both MFIs averagely. The loan officer’s overconfidence is significantly and positively related to the risk-taking decision, and thus, a lower loan portfolio quality. Besides, loan officers’ risk-taking behaviour harms these institutions’ solvency performance.

Originality/value

This paper makes an initial attempt to evaluate the effect of overconfidence behavioural bias on risk-taking decisions and its implication on the MFIs solvency and sustainability.

Keywords

Acknowledgements

The authors would like to thank the editor and the anonymous reviewers for their useful comments and suggestions.

Citation

Fersi, M. and Boujelbène, M. (2022), "Overconfidence and credit risk-taking in microfinance institutions: a cross-regional analysis", International Journal of Organizational Analysis, Vol. 30 No. 6, pp. 1672-1693. https://doi.org/10.1108/IJOA-11-2020-2510

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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